Question 1

Share capital is the ____ value of the contributions to the firm all shareholders have made in the beginning and during the life of the firm by making external resources available to the firm and giving up control over these resources.
A) Market
B) Historical
C) Fair
D) Adjusted

Accepted Answer

Share capital is based on the historical value of the contributions made by shareholders, which means it reflects the original investment amount made by them at the time of incorporation or later during the life of the company. Choice A is incorrect as it refers to the current value of shares in the market, which may differ from the original investment amount. Choice C is incorrect as fair value is a concept used in accounting to reflect the current value of assets and liabilities, and not for share capital. Choice D is incorrect as adjusted value does not have any meaning in the context of share capital.

Question 2

Acquired equipment is valued at its historical cost.

Accepted Answer

Acquired equipment is typically valued at its historical cost, which includes the purchase price and additional expenses related to acquiring and preparing the equipment for use, such as shipping and installation costs. This cost is then recorded as an asset on the company's balance sheet and depreciated over its useful life.

Question 3

An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Accepted Answer

This is the definition of an asset according to the International Financial Reporting Standards (IFRS).

Question 4

A liability is a past obligation of the entity arising from present events,the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Accepted Answer

A liability is a present obligation of the entity arising from past events, not the other way around.

Question 5

Shareholders' equity is made up of which two components?
A) Share capital and expenses
B) Expenses and revenues
C) Share capital and retained earnings
D) Expenses and retained earnings

Accepted Answer

Shareholders' equity is composed of two main components: share capital and retained earnings. Share capital represents the amount invested by shareholders in the company in exchange for ownership interest, while retained earnings represent the accumulated profits earned by the company that have not been distributed to shareholders as dividends. Expenses and revenues are components of the income statement, not the shareholders' equity section of the balance sheet.

Question 6

Which financial statement shows the financial picture of the organization on a given day?
A) Income statement
B) Statement of financial position/Balance sheet
C) Statement of retained earnings
D) Statement of cash flows

Accepted Answer

The statement of financial position, also known as the balance sheet, shows the financial position of the organization on a specific day. It includes assets, liabilities, and equity, providing a snapshot of the organization's financial health at the end of a given period. The income statement shows the organization's revenue, expenses, and net profit or loss over a specific period of time, while the statement of retained earnings shows changes in the organization's retained earnings over time. The statement of cash flows details the organization's cash inflows and outflows over a specific period, providing information on how the organization generates and uses cash.

Question 7

Which of the following equations is correct?
A) Net income = Shareholders' equity at the end of period t + Shareholders' equity at the beginning of period t (all other things being equal)
B) Net income = Shareholders' equity at the end of period t+1 + Shareholders' equity at the beginning of period t (all other things being equal)
C) Net income = Shareholders' equity at the end of period t - Shareholders' equity at the beginning of period t-1 (all other things being equal)
D) Net income = Shareholders' equity at the end of period t - Shareholders' equity at the beginning of period t (all other things being equal)

Accepted Answer

Net income is the difference between revenues earned and expenses incurred during a particular period. Shareholders' equity at the end of the period t reflects the owners' investment in the company, and Shareholders' equity at the beginning of period t reflects the owners' investment at the start of the period. Therefore, the correct equation is Net income = Shareholders' equity at the end of period t - Shareholders' equity at the beginning of period t. Choice A is incorrect because it includes Shareholders' equity at the end of period t+1, which is not relevant to the period being considered. Choice B is incorrect because it includes Shareholders' equity at the end of the next period rather than the current period. Choice C is incorrect because it subtracts Shareholders' equity at the beginning of the previous period rather than the current period.

Question 8

Which of the following sections form the statement of financial position/balance sheet?
A) Assets,liabilities and profit
B) Assets,liabilities and shareholders' equity
C) Assets and profit
D) Liabilities and profit

Accepted Answer

The statement of financial position, also known as the balance sheet, includes information on a company's assets, liabilities, and shareholders' equity. Options A, C, and D do not include all three of these key sections.

Question 9

Obligations and resources are listed in:
A) Increasing order of liquidity.
B) Either increasing or decreasing order of liquidity.
C) Decreasing order of liquidity.
D) Alphabetical order.

Accepted Answer

The answer of Obligations and resources are listed in:
A) Increasing...

Question 10

What is the result of recording a borrowing transaction?
A) An increase in both cash and shareholders' equity.
B) An increase in cash and a decrease in liabilities.
C) An increase in both cash and liabilities.
D) A decrease in cash and an increase in liabilities.

Accepted Answer

Recording a borrowing transaction results in an increase in cash (as the borrowed funds are received) and an increase in liabilities (as the obligation to repay the borrowed funds is incurred).

Question 11

Revenues are ____ in shareholders' equity.
A) Decreases
B) Not included
C) Increases
D) None of these.

Accepted Answer

Revenues represent the income earned by a company and they increase shareholders' equity through retained earnings. When revenues are recognized, they are added to the retained earnings portion of shareholders' equity, leading to an increase in overall equity. Therefore, the correct answer is "increases."

Question 12

Retained earnings represent that part of the firm's value created that:
A) Shareholders have chosen not to take out of the firm.
B) Lenders have chosen not to take out of the firm.
C) Shareholders have chosen to take out of the firm.
D) Lenders have chosen to take out of the firm.

Accepted Answer

Retained earnings are profits earned by a company that are not distributed to shareholders as dividends, but are instead kept within the company to reinvest in the business or pay off debt. It represents the portion of the firm's value that shareholders have chosen not to take out of the firm.

Question 13

Expenses are ____ in shareholders' equity.
A) Decreases
B) Not included
C) Increases
D) None of these.

Accepted Answer

Expenses decrease the net income of a company, which in turn decreases the retained earnings and ultimately shareholders' equity.

Question 14

Which items are traditionally listed first in North America?
A) Short-term
B) Valuable
C) Long-term
D) None of these.

Accepted Answer

In North America, financial statements typically list short-term assets and liabilities before long-term ones.

Question 15

What is the result of recording the acquisition of equipment?
A) An increase in both cash and fixed assets.
B) An increase in fixed assets and a decrease in cash.
C) An increase in both cash and liabilities.
D) An increase in cash and a decrease in fixed assets.

Accepted Answer

When equipment is acquired, there is an increase in fixed assets as the company now possesses a new asset. At the same time, cash is used to purchase the equipment, resulting in a decrease in cash. Therefore, the correct choice is B - an increase in fixed assets and a decrease in cash.

Question 16

Which items are traditionally listed first in Continental Europe?
A) Short-term
B) Valuable
C) Long-term
D) None of these.

Accepted Answer

Continental Europe traditionally lists long-term items first, followed by short-term items and then valuable items. This reflects the importance placed on long-term planning and investment in many European cultures.

Question 17

The statement of financial position/balance sheet is a set of two lists showing:
A) Resources on one side and obligations to external parties on the other side.
B) Revenues on one side and expenses on the other side.
C) Profit on one side and loss on the other side.
D) None of these.

Accepted Answer

The statement of financial position, also known as the balance sheet, shows the company's resources or assets on one side and obligations to external parties, such as creditors and shareholders, on the other side. This statement does not show revenues, expenses, profits, or losses.

Question 18

The way a claim is settled has an impact on equity.

Accepted Answer

The answer of The way a claim is settled has...

Question 19

(Beginning retained earnings balance)+ (Income from the period)- (____)= (Ending retained earnings balance)
A) Expenses
B) Dividends
C) Revenue
D) Interest

Accepted Answer

The missing element in the equation is the dividends, which represent the amount of profit that is distributed to shareholders. To calculate the ending retained earnings balance, we need to subtract the dividends from the sum of the beginning retained earnings balance and the income from the period. Therefore, the correct formula is:
Beginning retained earnings balance + Income from the period - Dividends = Ending retained earnings balance.

Question 20

Net income is generally calculated in a separate and subsidiary account called:
A) A statement of cash flows.
B) A statement of retained earnings.
C) An income statement.
D) A statement of changes in equity.

Accepted Answer

Net income is generally calculated in an income statement, which summarizes a company's revenues and expenses over a specific period, leading to a net income or loss for that period.

Quiz 2: Introduction to Financial Statements

Share capital is the ____ value of the contributions to the firm all shareholders have made in the beginning and during the life of the firm by making external resources available to the firm and giving up control over these resources.

Acquired equipment is valued at its historical cost.

An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

A liability is a past obligation of the entity arising from present events,the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Shareholders' equity is made up of which two components?

Which financial statement shows the financial picture of the organization on a given day?

Which of the following equations is correct?

Which of the following sections form the statement of financial position/balance sheet?

Obligations and resources are listed in:

What is the result of recording a borrowing transaction?

Revenues are ____ in shareholders' equity.

Retained earnings represent that part of the firm's value created that:

Expenses are ____ in shareholders' equity.

Which items are traditionally listed first in North America?

What is the result of recording the acquisition of equipment?

Which items are traditionally listed first in Continental Europe?

The statement of financial position/balance sheet is a set of two lists showing:

The way a claim is settled has an impact on equity.

(Beginning retained earnings balance) + (Income from the period) - (____) = (Ending retained earnings balance)

Net income is generally calculated in a separate and subsidiary account called: